Homeowners Insurance Basics

The homeowners insurance policy protects our most valuable asset; our home. The policy is designed to cover a wide variety of perils all packaged together into one policy. This homeowners policy is one of the most comprehensive property policies available to the insurance buying public. Many insurers offer a variety of different policy types. Two basic types are the named peril policy and the open peril policy. The named peril policy specifically names the perils that are covered in the policy while naming some common things that are excluded from being covered. The open peril policy names some common things that are excluded from coverage and covers most other events. The open peril policy is generally the better choice if it is available but often this policy is more expensive. Policies also generally offer either replacement cost or actual cash value coverage. Actual cash value or ACV means replacement cost minus depreciation. This means that depreciation applies when you settle the claim with your insurer. Replacement cost is simply what it would cost to replace without any depreciation. Replacement cost is the better choice if it is available. It is important to note that a homeowners insurance policy is not designed to be a home maintenance policy that will provide coverage for everything that goes wrong in the home. Maintenance is the responsibility of the homeowner and wear and tear is excluded on all policies. Homeowners insurance is designed to cover sudden and accidental events. Contact your agent to find out all of the specifics regarding your policy.

All states have different policy types that are approved for sale to the insurance buying public. Most will have these common coverages:

• A. Dwelling - This is the amount of coverage afforded for the structure of your home. The value of the land is not part of this coverage.

• B. Other Structures - This coverage applies to any structure located on the property that is separated from the dwelling by a clear space. The coverage amount afforded under this provision is often limited to 10% of the amount of coverage on the dwelling.

• C. Personal Property or Contents- This coverage applies to almost all items within the home that are not attached to the dwelling. The coverage is often limited to 70 – 75% of the amount of coverage on the dwelling. Often there are limits on specific items within the home. For example, a special limit of coverage may apply for jewelry, silverware, computers, etc. An agent can provide you with the details.

• D. Loss of Use - This coverage will pay for any additional living expenses that you might incur as a result of a covered loss. For example, if you have a fire in your home and are forced to live in a hotel until it is safe to return to the home, this provision will pay for the hotel. The limit on this coverage is often 20% of the amount of coverage on your dwelling.

• E. Liability  - This section of the policy will pay for a legal liability judgment against the insured for a third party person(s) who was injured while on your property. This is a broad coverage that can sometimes apply for acts away from the property itself. An example of when this coverage would apply might be that if a person walking by slipped and fell on the sidewalk in front of your house, was injured and filed a lawsuit seeking a monetary reward for those injuries. This coverage would not only pay the monetary reward if the lawsuit was successful but would also pay for the legal defense (legal fees). Typical limits for this coverage are $100,000 to $500,000.

• F.  Medical  - This coverage will pay medical bills for a third party person(s) that is injured while on your property. This coverage does not provide coverage for the insured or spouse or any resident relative. Typical coverage limits found in this section are $1000, $2500 or $5000. 

Here is a sample of how the coverage limits might look on a typical policy:

       A. 100,000      Dwelling

       B.  10,000       Other Structures

       C.  70,000       Contents

       D.  20,000       Loss of Use

       E. 300,000       Liability

       F.     1,000       Medical

Homeowners insurance costs have increased dramatically in the last few years due to many unpredictable catastrophic weather events. Insurers are in the business of managing risk which involves having methods that allow them to predict the probability of future claims and then base premiums at levels that will allow them to be profitable. When weather starts to become unpredictable, as it has in the past few years, losses mount and the companies must pay the claims and ultimately premiums rise. This is common in any business. The property insurance industry is now in the process of re-evaluating their respective books of business and implementing risk management policies ranging from raising premiums to not offering polices in some areas at all. The goal is to maintain profitability so that they can continue to be in the business.

It has never been more important to have a qualified agent to handle your homeowners’ insurance needs. Call one today.